Rule #1 Finance Blog

With Investor Phil Town

6 Money Traps to Avoid in Your 40s

By the time you’ve reached your 40s, you’re probably earning more, saving more, traveling more, and feeling more comfortable…

But, be careful!

You still face the potential to have your cost of living creep up to a level that could cause problems.

Here are six common money traps to avoid in your 40s so you can set yourself up for financial freedom in retirement.

1. Overspending on Your Kids

We all love our kids, but in your quest to give them everything they’ve ever wanted, you could also put yourself at a major financial disadvantage, both in the present and in the future.

It’s easy to get caught up in buying them a new car, the latest iPhone, or taking them along for a luxury family vacation.

All of these things are nice, but if you can’t afford them or are dipping too far into your savings you’re going to have problems long term.

There is also the cost of their college education to think about. You don’t want to spend money from your retirement savings to help pay for their degree.

If you do, you’ll end up being a greater burden on your kids when you can’t afford to live on your own because you had the wrong priorities in your 40s.

The cost of higher education is only going to rise and, in most cases, your child will benefit much more from a college degree than they will from a brand new car.

2. Relying on Pension for Retirement

The second big money trap people fall into is thinking that government or pension payouts will get them safely through retirement.

Pensions are not as common as they used to be — and even if you’re lucky enough to have one, chances are you can’t rely on it alone to get you through retirement.

Plus, there’s just no way to beat around the bush here: Social Security benefits just aren’t the same as they used to be.

It’s very likely that you won’t be able to live the same type of lifestyle in retirement that you’re living now.

3. Not Investing Enough

The third money trap is simple. Most people in their 40s are just not adding enough to their investment portfolios.

Your 40s are a time when you should really have a decent nest egg saved up and you’re making good, consistent returns from compound interest.

Keep riding that momentum by adding regularly to your investments.

Keep researching good companies to add to your watch list, and be ready to make a purchase when those vetted businesses go on sale.

4. Buying Bonds & CDs

The fourth big money trap is buying bonds or certificate of deposits. You might think that as you get a little closer to retirement age, bonds and CDs are a safer choice for your money.

The problem is at an average interest rate of 3%, they’ll barely cover the cost of inflation every year!

Instead of continuing to add to your investments and take advantage of that compound interest, you’re essentially stagnating your potential for growth. 40 isn’t the time to quote, “play it safe” with bonds or CDs.

5. Not Taking Care of Your Health

The fifth trap? This one is a doozy. NOT taking care of your health. Remember, caring for your money isn’t the only important thing for you to focus on in your 40s: you also need to take care of yourself.

Staying fit, going to the doctor, and making wellness a priority is something that will pay dividends long into retirement.

Think of all the money you could save (and earn) by diverting those funds into investments rather than giving them to hospitals and high insurance deductibles. Prevention is much less expensive than treatment.

6. Panic Selling

The last big money trap for those in their 40s is the panic that drives them to take money out of investments when the market goes down.

There’s a common fear that when you’re getting closer to retirement you won’t have as much time to recoup losses.

Avoid the knee-jerk reaction of pulling your money out and getting yourself stuck in a major money trap by stopping the compounding returns you could be making in their tracks 20 years too soon.

There’s still plenty of time to rebound and even grow your wealth before you reach retirement age.

If you’re following the Rule #1 strategy of investing, then you’ve already invested in great companies that are on sale and that will continue to be profitable in the long term.

Do you know how much you need to retire? I’ve got a free retirement calculator so you can find your number.

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Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.